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Economics

There’s an old economic saw that goes: If you pay a couch potato to sit on his ass, he’ll keep his rear-end parked firmly in front of the TV.

OK, so maybe the proverb didn’t mention slothfulness and prat. The more well-known version concerns fish and pedagogy. But I think the lesson needs an update in light of an increasingly popular welfare ruse.

In the pages of the Wall Street Journal, social theorist Charles Murray proposes the ultimate form of the dole: a guaranteed income for all adult Americans. “The UBI [universal basic income] is an idea whose time has finally come, but it has to be done right,” he writes. How does one give away loads of free money “right,” you ask? By eliminating the entire welfare state, including Social Security and Medicare. Rather than have the less-well-off jump through bureaucratic hurdles trying to get food stamps, Medicaid, section 8 housing, and Obamaphones, just cut them a check and cut out the middleman.

“Under my UBI plan,” Murray notes, “the entire bureaucratic apparatus of government social workers would disappear, but Americans would still possess their historic sympathy and social concern.” The concern would be replaced with a faceless monthly bank deposit, presumably debited on the “1st of tha Month.”

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If someone says that America is the one nation based on an idea and not an identity one more time, I swear I’ll…..

Eh, probably complain about it online before moving on to more practical matters. Anyway, here’s my latest Taki’s Mag piece about why Mexican immigrants need to assimilate or go home. An excerpt:

I can’t think of a better example of the “propositional nation” concept so enjoyed by the left. Liberals love to crow about America being an open, welcoming society for all. Mainstream conservatives, who wet the bed over the possibility of being called xenophobic or hateful, have foolishly given in to this abstraction. In a recent address to a group of congressional interns (read: a publicity stunt), Speaker of the House Paul Ryan contended that “America is the only nation founded on an idea—not an identity.”

The late Harvard professor Samuel Huntington has covered this ground before, but let’s recap: America is a country founded by men of English descent, informed by Protestant theology and Enlightenment ethics. The founders didn’t create a country and system of government that was meant for pygmy hut-dwellers. It was made for what John Jay called in Federalist No. 2 “a people descended from the same ancestors, speaking the same language, professing the same religion, attached to the same principles of government, very similar in their manners and customs.” These “people” just so happen to be predominantly Anglo-Protestant. Over time, other creeds and ethnicities have adopted, sometimes imperfectly, the American identity, including Germans and Catholics. But we still remain a weird breed compared with, say, the goat-lovers in Syria.

So why is Ramirez so clueless about the historical roots of the country he was born in?

Read the rest here. And please, don’t put guacamole on your burger, unless you truly want to see America die.

The gender pay gap has received a decent amount of attention recently, and, in response, has also been refuted over and over again. Knowing this, I thought that writing a piece explaining why the “gender wage gap” doesn’t exist would be beating a dead horse, so I never did. But, the Washington Post just released a poll in conjunction with the Kaiser Family Foundation that delves into contemporary opinions on feminism, and, according to this poll, 75 percent of respondents said that their top priority for improving women’s lives is “equal pay for equal work.” Apparently, this myth just won’t die, and I can’t sleep at night knowing that people still believe it. Everyone will be happy to know that women are, in fact, paid equally for equal work.

The so-called “gender wage gap,” also known as the “gender pay gap,” relies on the confusion of simple economic concepts: the difference between wage and earnings. Wage is the amount of money you are paid per unit of work, i.e., dollars/hour, dollars/project, percent commission, and so on. Earnings, in this case, is the total amount of money a person makes over a lifetime (or a given period of time, i.e., earnings over 20 years).

The problem with this myth lies in feminists taking the average lifetime earningsbetween men and women, and then spinning the difference between those earnings as a wage gap. This is a critical distinction, because a wage gap would be immoral, and people instinctively know that. Paying some people less per unit of work is wrong. But this isn’t a wage gap, it’s an earnings gap. If there really were a wage gap, those profit-hungry corporations (that leftists love to hate) would only hire women, since paying people lower wages for the same work would help their bottom line.

There is a difference between men and women’s lifetime earnings, which can be explained by the choices men and women make. Women are less likely to take risks in their careers, meaning they are less likely to become entrepreneurs or go into business, and are more likely to take a more tracked path to their careers through something like graduate school.

Let’s take a hypothetical example. A woman graduates from college, takes a year off, and chooses to get a doctorate degree. The average PhD takes about eight years to complete — meaning that a young woman who starts her PhD program at 22 will likely finish when she is 30. So, she goes to graduate school, netting zero income for those eight years (graduate students usually make around enough money to pay for living expenses), and then she works for two years. By then, she’s 32, a time when lots of women have children, and takes a year off because she has a baby. By the time she is 40, if she returns to work after that year, she will have only worked a total of 10 years with a positive net-income, meaning she was only making money for 10 years of her career before age 40. Meanwhile, a man she graduated college with, who has been working for a private company since he graduated, has been working for 18 years and is reaping the benefits of the promotions and pay raises that come with being a business professional for 10+ years. Those two people are going to have very different lifetime earnings — because they made different choices.

This example depicts one scenario, but there are many more in which women choose less lucrative career paths than men. Whether you like it or not, career choices affect the amount of money you will make over a lifetime. That is not something that is unjust or outrageous. Confusing wages with earnings to mislead people, on the other hand, is unjust and outrageous. It also makes women seem economically illiterate, which I don’t appreciate very much.

Lots of people have done more in-depth statistical analyses of the gender wage gap if you want to read more. I only wanted to correct some economic misconceptions so that I can sleep at night.

Daisy Belden is a senior at the University of Michigan. She is an aspiring entrepreneur and writer, with a love for the controversial and contrarian.

Elizabeth Warren has spent her congressional career raging against big-bank bogeymen. She was elected from the People’s Republic of Massachusetts based primarily upon her tough stance against the financial industry. “Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress, no shame, demanding favors and acting like we should thank them,” she boomed at the 2012 Democratic National Convention.

Hallelujah to that, Sister Warren.

I have no qualms with ripping on the coke-addledcomputer nerds on Wall Street who make money hand over fist without creating anything. I agree with Brit Lord Adair Turner, chairman of the country’s chief financial regulatory body, that most of what goes on in the ledgers of too-big-to-fail banks, trading on amalgamated debt instruments and betting if blue-collar Billy will lose his house, is “socially useless.”

These complaints might all seem trivial (and insane), but they add up. Nagging protests have the ability to snowball until they become a coherent message. By constantly hammering away at the idea that men are incorrigible Neanderthals with their brains set on “rape,” feminists have altered corporate culture so that guys must be on guard every second of the day. If they slip up, it’s a one-way trip to the unemployment line.

It’s an unhealthy mix that affects productivity and basic workplace camaraderie. Yes, there are definite cases where men take advantage of naive office girls (this is especially true in D.C., where the office manager is often having an affair with the cute twentysomething coffee fetcher). But feminists trying to equalize the workplace are engaging in a Sisyphean task. Men and women just aren’t made to work together as a unified team. The sexes are different. They excel at doing different things.

Just consider the examples of accepted sexual differentiation in our society. Professional sports are demarcated along gender lines. You rarely see a female construction worker on the site of a new skyscraper. Hooters isn’t about to hire men as waitresses.

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I have been interested in the creation of private cities for some time. A recent email exchange with Paul Romer (who I want to say was kind and clearly communicated with me which I very much appreciate as I have been critical of his work and he is a person whose time is very valuable) has led me to realize that I should write up a 15-minute pitch explaining my beliefs.

First, why care about laws at all? Romer’s TED talk is still probably the best introduction. Basically, rich countries are rich because they have good governments, poor countries are poor because they have predatory governments. A good government is one that allows private property, contract, exchange, rule of law, and organization. A bad government is one that prevents those things. With private property, contract, exchange, rule of law, and organization people learn to produce wealth, trade and have a higher standard of living. This is not just my opinion, it has become close to a consensus among economists who study the issue (see here for the best introduction, here, here, and here for econometrics, and here for a more advanced “why” analysis).

So basically, laws, or institutions, which can be thought of as the power structures which determine laws, determine the wealth or poverty of nations. So, why care about institutionally autonomous cities, institutional autonomy meaning having substantively different laws from the rest of the country? Basically, institutional change is very hard. British Prime Minister Gordon Brown has been known to quip that “the hardest part about building rule of law is the first 500 years.” In other words, getting the institutions right is very difficult.

The fall of the Soviet Union offers a useful example. A lot of well-intentioned economists tried to “fix” the former Soviet Republics. There are some success stories, Poland for example, but overall most of the countries failed to perform as anticipated. The economists were more focused on getting the prices right, than ensuring the courts were free and fair and the bureaucracy wasn’t corrupt. Another example is both Iraq and Afghanistan. The US poured hundreds of billions of dollars and thousands of lives into both, and the result is less evil governments than before, but hardly a substantive change in living standards for most of the population.

Institutional change is difficult because it first requires asking the institutions, to admit they do not function well, and second, to reform. These problems are only necessary because the institutions do not function in the first place. If a government was capable of doing so they would likely have already done it. In some sense, it is like asking coal to squeeze itself into a diamond.

Institutionally autonomous cities offer a way around this difficulty. By being built in rural land with no strong interest groups, they do not disrupt the status quo. Second, by being opt in, the acquire more legitimacy. They are not an outside body imposing new laws on an unwilling populace, but rather a new option for people trying to make a better life for themselves. Simply put, because they are regional instead of national, institutionally autonomous cities offer an easier path to institutional change.

So, I have focused my studies and energies on institutionally autonomous cities because I believe they offer the best option for institutional change, economic development, and improving the lives of the least well off humans.

Of course, there are different visions for the ideal institutionally autonomous cities. The visions can be distinguished by the governance body for the cities.

The best known advocate for institutionally autonomous cities is Paul Romer. His vision is Charter Cities. The governance body in a Charter City would be a first world country, Denmark for example. In that sense it would directly import first world institutions to third world countries. Instead of Indians or Zimbabweans needing to move to Denmark, Danish law and the opportunities and economic growth that comes with it could be brought to this country.

However, Charter Cities are not the only option. I think private institutionally autonomous cities, administered by Google for example, could produce better results more quickly than Charter Cities. However, before I discuss why I would like to say I pretty much entirely agree with the Charter Cities project. I think building a Charter City would likely be an enormous success. It would generate a great deal of wealth and improve the lives of people in the host country. In this sense, my quibbles are relatively minor. A Charter City would be a huge leap forward from the existing world, and a private autonomous city could be a small step beyond a Charter City.

So, why do I prefer a private city. The primary reason is adaptability. Building a new city is a megaproject. Private companies would be more responsive to changing conditions, new information, and unforeseen challenges. However, before going into more depth, I would like to take a second to explain how a private autonomous city would function.

A private autonomous city would begin by buying a large area of relatively uninhabited land. They would also negotiate for institutional autonomy, basically a special economic zone. For this essay I will assume a private city state, for complete autonomy, but the arguments I make will also apply to a private city with more limited autonomy.

The business model would be similar to that of a mall. The proprietor of the land would pay for improvements, then rent out the space at a higher value because of those improvements. In this scenario, the improvements would be traditional public goods, roads, lights, water, sewage, electricity, as well as non-traditional public goods, police and courts.

The general argument is that the land proprietor would have a long term interest in the economic success of the city because such success would increase the value of the land and therefore the rents of the proprietor.

For this essay I will focus on the non-traditional public goods, police and courts, and conclude with my argument that private autonomous cities would be more adaptable. Traditional public goods are often supplied by private contractors to governments, suggesting it would be easy for a private city to contract with similar companies, if not do it themselves. Further, to the best of my knowledge, no one has argued against private cities on the grounds of higher utility costs.

The strongest argument against a private criminal and civil justice system is that it would favor the powerful. A private city, especially a small one, would likely have a small number of large employers. Several big companies would pay a disproportionate share of the city’s budget, and the city would be somewhat beholden to them. Combined with the more direct link between rent and profit this could lead to a criminal and civil justice system that favors the powerful. Especially because residents in a private city would not have the same sense of ownership as they might in a democratic city. Rather than citizens, they would be more akin to customers, which could embolden the city to favor the powerful and delegitimize the voice of the residents.

This argument applies to civil justice, police, and criminal justice. I will discuss them in that order. However, first I will make several general arguments which apply to all three.

First, all cities will have some companies which pay a disproportionate amount of taxes. The specific claim against private cities, is that private cities will be more likely to favor the powerful than other types of city governance. It is not obvious that private cities will necessarily be worse in this regard. Reputation will be very important to a private city hoping to convince residents and companies to locate there. A perception of injustice, either in the civil system, police, or criminal system, could hurt them in the long run.

As an example, many companies, Amazon, MasterCard, Geico, and Ebay for example, likely have a small number of sellers which account for a disproportionate amount of revenue. However, there companies are generally perceived as fair in their dispute resolutions. Few people are going to buy car insurance from a company that favors large clients, or use the credit cards of a company that has unfair dispute resolution mechanisms.

Second, such critiques of private autonomous cities often underestimate how bad civil justice, police, and criminal justice is in undeveloped countries. For a quick sense skim the World Justice Project’s report on the Rule of Law. For example, 21%, 23%, and 24% of Nigerians believe that police, follow the law, respect the basic rights of suspects, and are punished for breaking the law respectively. As a personal anecdote, several Honduran friends have told me they fear the police more than they do the gangs, even though Honduras is the murder capital of the world. More generally, it is common knowledge that justice systems in the undeveloped world rarely deliver justice. Unfortunately, that knowledge is often forgotten or ignored when considering the possibility of a private replacement.

There is strong evidence that private civil justice mechanisms can perform as well, if not better than public civil justice mechanisms. The best book on this is “Private Governance”, by Edward Stringham. One particularly telling example is the emergence of the Dutch stock exchange. Not only was short selling not enforced, it the Dutch government actually banned it. Nevertheless, people continued to write short contracts and they continued to be paid. Those who refused to pay contracts, even ones that were technically illegal, were simply banned from future participation in the stock market.

In a more modern example, international trade is often “lawless.” Companies frequently specify that contracts be settled under private adjudication for both speed and accuracy, as government courts sometimes fail to keep up with complex commercial contracts. The prevalence of international arbitration is reflected in detailed guides to drafting contracts, exemplified here, and here. Such contracts show private dispute resolution is often better equipped to handle complex contracts.

To some extent, international arbitration clauses can be said to exist in the shadow of the state. The New York Convention ensures participating governments enforce private arbitration agreements and rulings made in other countries. However, Peter Leeson found that state enforcement only accounted for 15-38% of international trade, a substantial amount, but not nearly enough to suggest private mechanisms were not working.

There is less evidence that private police can perform as well as public police. This is not to suggest there is suggesting private police would be worse than public police, merely that there is relatively little evidence regarding private police at all.

Edward Stringham has an article about private police in San Francisco. When people and businesses who hired the private police force were asked why they did not use the free public one, responses ranged from, “they take too long to arrive” to “they scare me”. The best response was “that’s a joke right? I have little confidence in SFDP”.

The best argument for private police is the general untrustworthiness of public police in the undeveloped world. I think most honest well-traveled people would admit they trust security guards at restaurants or hotels more than the local police. Unfortunately, improving on public police in the undeveloped world is not a very high bar.

The last, most controversial point, and the one with the least evidence to support privatization is criminal courts. This would be an extreme example, as it is highly unlikely that a private city would gain sovereignty. If a private city did manage to gain some autonomy, the criminal courts would likely be the last thing a host country would abdicate control over. While there is very little evidence on this point, I would like to make several overarching statement.

First, there are lots of examples of private actors acting badly in criminal justice, honor killings, feuds etc. However, I think these examples have as much bearing on a private city as the Saudi Arabia beheading teenagers has on arguments for social democracy. While they are in some ways the same, private criminal justice, and the actions of a state, they strip out the context that makes them different. Saudi Arabia is still a primitive state and honor killings are a primitive form of private justice. If Google were to build a city it is hard to believe it would try to build the honor killing, teenager beheading, primitive criminal justice system.

Second, a private city could remove sovereign immunity. Wrongful actions taken against citizens, including in the criminal justice sphere, would penalize the city.

Of course, that private cities could provide better civil justice, police, and criminal justice than undeveloped countries does not mean they would do a better job than a Charter City, merely that they would be better than the status quo. A Charter City, assuming it is implemented well, would provide civil justice, police, and criminal justice, at a level consistent with the Charter country. In other words, a Charter City would have low variance of its justice system.

A private city on the other hand, would have high variance. It could outperform a Charter City, but it could also greatly underperform a Charter City. Compared to a Charter City, a private city would have a slightly higher ceiling, but a much lower floor.

So, given the expected value of a private city based on civil justice, police, and criminal justice, is lower than a Charter City, why prefer a private city? The answer is adaptability, the ability to respond quickly to rapidly changing on the ground circumstances.

Cities, especially institutionally autonomous cities, are complex. The problems they have at 10,000 people are not the same problems they face at 1,000,000. Difficulties faced by the developer will not scale linearly. This requires a decision making body that is equipped to respond rapidly and effectively to such problems. Simply put, that body is not government.

One illustration of the difficulty of complex systems is massive multiplayer online games. Some of the more popular online games have millions of players trading with each other. While companies can test the games with thousands, even tens of thousands, of players before release, the dynamics will fundamentally change with millions of players. Often times the initial release is followed by several months of trying to rapidly respond to consumer feedback about the game. For comparison, take the difficulty state governments have had in establishing Obamacare exchanges online. Hawaii spent $205 million dollars developing a website far simpler than most big budget modern games, and it doesn’t even work.

Another example is the refugee crisis in Europe. Naguib Sawiris, an Egyptian Billionaire, is actively trying to buy a Greek island to house refugees. The EU, which has the resources, as well as the political clout to create a refugee city on a Greek island is standing on the sidelines.

For another thought experiment, think of a major institution of the US government that can respond quickly and effectively to new problems, the FDA, the Department of Homeland Security, the Department of Energy? The Department of Homeland Security is the newest cabinet level department created in the US. It’s most visible program, TSA, is widely considered a failure. It was recently revealed that they had a 95% failure rate in a test, failing to detect 67 out of 70 people trying to sneak fake bombs and guns on a plane. Is the political body that created the TSA really going to create an organization capable of building a Charter City, especially as the problem faced by the TSA is far simpler than problems faced by a Charter City. In this sense it is possible for a Charter City to end up a large boondoggle, a new Brasilia built but mismanaged to the point of vastly underperforming expectations.

In a Charter City there is the added problem that the decision making body would not necessarily be close to conditions on the ground. If Denmark, for example, is the Charter Country, would we expect all the Danish workers to move to sub-Saharan Africa? Requiring them to move would likely eliminate many married or elderly workers. If they are not required to move, they will be out of tune with the local conditions.

That being said, there are historical examples of public cities rapidly growing, Shenzhen being the most prominent example. However, these cities had different institutional arrangements than what is likely to arise in a Charter City.

To conclude I’d like to reiterate my main points. Institutionally autonomous cities are currently one of the best ways to improve the lives of the world’s poorest. The two competing visions of institutionally autonomous cities are Charter Cities and private cities. The primary advantage of Charter Cities is low variance and better provision of justice systems. The disadvantage is adaptability. The advantage of private cities is adaptability. The disadvantage is the low floor for the justice systems (though even a low floor would likely be an improvement in many undeveloped countries).

Ultimately, the success of a Charter City or a private city will depend on the organization with decision making authority. It is certainly possible, though unlikely, that business, growth oriented organization can emerge from negotiations between two governments to build a Charter City. Similarly, it is possible that a business with few ethical scruples can take advantage of a country granting institutional autonomy, preying on those who move there. The potential success of either project will depend the governing body, and those of us interested in such a project should do what we can to ensure the process for choosing the governing body is fair, open, and transparent.